Here’s why it’s crucial that the deal is done as soon as possible, and why the schedule of 46 working days – including today – that Greece, the private sector, the euro zone and the International Monetary Fund have to complete it is very tight indeed.

Greece has a €14.4 billion bond maturing on March 20 that it can’t afford to pay in full, but the steps to be taken between now and then are many, technical, difficult and large.

It should be clear that if Greece doesn’t manage to complete the restructuring by March 20, it will go into a hard default. While the market has largely priced in this eventuality, the fulfillment of the scenario is ultimately unpredictable.

It first has to come to an agreement with its private-sector creditors. These talks have just been suspended and are said to resume this Wednesday.

If it doesn’t get high enough participation, Greece will likely force the rest of the creditors into the deal – making it an involuntary restructuring that most likely will trigger credit-default swap contracts.

It must also publish a term sheet detailing the characteristics of the bonds it will offer (yield, maturity, etc.) and invite its bondholders to tender their bonds and receive the new ones.

Then the bondholders have to reflect on the deal for a while before formally accepting it – or indeed rejecting it.

In the eventuality of a forced restructuring, the country would have to physically hold a vote among creditors to ensure that a majority is on board, thus making use of the CACs to bind in the minority opposing the deal.

This is the stage where some creditors are likely to begin litigation processes against the country on various grounds.

Assuming all has gone smoothly thus far–or even that the CACs have been used and the minority bondholders have been forced in–the deal has to be consummated, i.e., bondholders must give Greece their old bonds and get new ones.

For the deal to be consummated, Greece’s not-too-happy euro-zone peers have to sign off on sending some €60 billion its way. Why? Because it will need €30 billion to recapitalize its own banks that will face collapse after they take the losses in their holdings of Greek debt and another €30 billion to give to the wounded bondholders as an upfront cash sweetener.

We are told the euro-zone countries will discuss these rather large disbursements at their Jan. 30 summit.

So after the euro-zone countries have signed off on the funds and Greece has actually received them, the bond exchange can go forward.

It’s difficult to estimate how long each of the above steps will take but it’s clear that there are several things that could go wrong between today and March 19.

It should be noted that the completion of the Greek debt restructuring within the next 46 working days by no means implies that Greece is rescued, or that its debt is on a trajectory towards becoming sustainable.

It merely means that the imminent threat of hard default is averted.

A final note: because Greece’s bonds don’t have so-called cross-default clauses written in them, if Greece were unable to repay its March 20 maturity, it would go into a form of a “mini-default”– at least technically speaking.

The event, however, would still trigger CDS contracts on some chunks of debt. It would illustrate the almost untenable position Greece is in and would spook the market as a preview of what a Greek disaster might look like. It would also likely make the rest of the vulnerable euro-zone bond markets jittery and could cost a Greek bank or two its viability.

Comments (4 of 4)

Dear Truckbomb,
I am sure the whole world feels so sorry for the naive, innocent, poor hedge funds that bought Greek bonds (and CDSs) at the 20% percent of their value and now want to make profit on it. Bad situation of Greek economy was known since years before. Greece was for the last many years under specific EU commission quarantine (official announcements). Bond holders should be more careful on whom they lend. That is free market and capitalism my friend.

3:02 am January 17, 2012

Truckbomb wrote :

Wonderful, the fools in the Euro Zone that allowed, if you will pardon the expression, the Greek Trojan Horse into their midst have only themselves to blame. In Game Theory terms we have the two sides, the Greeks and collectively everyone else who is called on to contribute to save the Euro. The Greeks have a pure strategy. They have time on their hands, can unilaterally change the terms of their bond commitments, can survive a hard default due to a new found ability to print money to restore their economy (think Argentina) and can avoid politically unfavorable Draconian austerity measures demanded by their tormentors. In short the Greeks have a dominate Nash Equilibrium position. The other side is faced with Armageddon (pardon requested here also). They either have to bail out the Greeks entirely paying the extortion for years to come or face the inevitable abandonment of the Euro. Meanwhile, the Greeks keep taking the bailout until the others wise up to the scam and finally abandon the Euro to save themsselves.

7:59 am January 16, 2012

SeanOC wrote :

Looks like we are heading for a disaster. As soon as the Greeks change their national laws to undermine the sovereign debt obligations this will be the benchmark for the other EZ strugglers. Who in their right mind will be domestic law EZ bonds after that? leaving aside the fact that policy makers repeatedly promised that this would be a voluntary process with no CDS credit event. Bye Bye Euro!

7:26 am January 16, 2012

blackswancrash wrote :

"While the market has largely priced in this eventuality, the fulfillment of the scenario is ultimately unpredictable."

what an oxymoron. The market is incapable of pricing in this eventuality as noone knows the ultimate result or how many banks will go under